The comparative costs of climate change

How much will decarbonizing the economy cost, and compared to what?

Probably the most widely discussed economic analysis on what the transition to a low-carbon economy will cost is the so-called Stern Review by British economist Nicholas Stern.

First released in 2006, the report put these costs at 1 percent of Gross Domestic Product. Then, in 2008, as it became clear that Earth's climate was changing faster than many had forecast, Stern upped the estimate to 2 percent of world GDP.

While he acknowledges that this cost presents a challenge, he asserts that without this investment the world economy faces a possible climate change-induced recession that would cost 20 percent of world GDP.

As might be predicted, the report was criticized from both sides of the climate-change discussion. Those who favor doing nothing say that Stern sorely underestimates the costs of stopping all fossil fuel use. Those who favor action say that Stern underestimates the potentially catastrophic costs of climate change.

The 2008 Garnaut Report, billed as an Australian version of the Stern Review, supported Stern's basic findings. "[T]he costs of action are less than the costs of inaction," it stated.

And it, too, came under criticism from both sides.

But for our purposes here, let's assume that weaning ourselves off fossil fuels will cost 2 percent of world GDP. How much is that, and what does it mean?

The GDP of the entire world — the Gross World Product — was $61.22 trillion in 2008, according to the CIA World Fact Book.

The largest single GDP, that of the European Union, equalled $18.14 trillion. That's $33,700 per capita.

The United States' GDP, ranked at No. 2 in the world, came in at $14.44 trillion. Per capita, that's $46,900.

So let's break down the costs of climate mitigation:

For the US, 2 percent of GDP equals $288 billion. Per person, that works out to about $938 yearly. It's not exactly nothing. But it's also not overwhelming. On a monthly basis — $78 per month — it's a little higher the price of the average cellphone plan.

How does it compare to our other national expenditures?

The debate over healthcare that's recently occupied the airwaves has underlined just how much the US spends [PDF] on it — some 16 percent of GDP, or $2.26 trillion. By comparison, this preventive measure for our planet's climate — one-eighth the amount — is tiny.

Of course, we have the highest healthcare expenditures per GDP of any country in the world. More to the point, the need for healthcare is often acute. People need it now. By contrast, we'd be decarbonizing the economy for benefits far in the future.

What else compares cost-wise?

According to the National Priorities Project, the combined costs of the wars in Afghanistan and Iraq — initiated as a preventive war — since 2001 is, so far, $950 billion. In 2008 alone, war expenditures surpassed $710 billion. (They've since begun to fall.)

Spending on war equaled 4.8 percent of US GDP in 2008, double what the Stern review says is necessary to address the climate problem.

Other comparisons:
According to this Bureau of Labor Statistics analysis of consumer expenditures in 2008, Americans spend about 5.6 percent ($2,835) of their after-tax income ($50,486) on entertainment. By cutting our consumption of entertainment in half, we could solve the climate problem.

According to the same report, Americans spend $5,605 — 11 percent of their after-tax income – on pension plans and personal insurance. No one is saying that Americans should go without pensions and personal insurance. The point is, we see it necessary to spent a not-inconsiderable portion of our income planning for something that might happen. Indeed, according to this report [PDF], in 2004, Americans spent 6.2 percent of the GDP on non-life-related insurance.

Even if we believe that the vast majority of scientists are lying to us when they tell us that climate change is a problem, shouldn't we at least hedge our bets? That's one take on the argument of economist Martin Weitzman at Harvard University.

"The probability of a disastrous collapse of planetary welfare from too much CO2 is non-negligible, even if this low probability is not objectively knowable," he writes.

In other words, even the probability of something catastrophic happening — the rapid melting of the Greenland ice sheet, for example, or getting in a car accident — is relatively low, if its happening is catastrophic enough, then spending some money to avoid it now is prudent.

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